Don’t give in

Government must not buckle under pressure, should stick to interest rate cut.

Published: April 27, 2016 12:17 am

Labour Minister Bandaru Dattatreya

The Central government is heading towards another showdown with the trade unions on the issue of the interest rate paid on the Employees’ Provident Fund (EPF) accumulations. Setting aside the decision of the Central Board of Trustees (CBT) of the Employees’ Provident Fund Organisation (EPFO), the government has stated that EPF would earn an interest of 8.7 per cent. The CBT had recommended 8.8 per cent, up from the 8.75 per cent paid in 2013-14 and 2014-15, which was higher than the 8.5 per cent paid in 2012-13 and 8.25 per cent in 2011-12. The government’s decision to reduce the rate instead of raising it further has predictably evoked a sharp response from the trade unions, who have dubbed the move “anti-labour”. There are valid reasons for the government’s decision, and it is crucial that it doesn’t buckle under pressure as it has done twice already since the budget was presented at the end of February.

In February, Labour Minister Bandaru Dattatreya had announced an “interim” interest rate of 8.8 per cent to be paid to the four crore EPF subscribers in 2015-16. But in reality, it is the finance ministry that takes the final call on this matter each year. More importantly, the decision to cut EPF rates is in line with the decision to cut the interest earned from small savings schemes such as post office savings, the Kisan Vikas Patra (cut from 8.7 to 7.8 per cent ) as well as Public Provident Fund (from 8.7 to 8.1 per cent). The ministry had also announced that the rates on such small savings schemes would henceforth be revised every quarter. The persistently high lending rates have been a dampener for an investment-starved economy. By excluding the EPF, presumably due to lobbying by trade unions, the government would be doing great injustice to the common man who invests in, say, a PPF and has no one to lobby for his interests.

The government must also stand its ground this time on account of the importance of political signalling. By rolling back two of its earlier decisions with regard to the EPF at the first sign of protests — on April 19, it cancelled a notification that tightened rules for the withdrawal of EPF accumulations till the age of 58, and on March 8, it dropped the revised norms for taxation of EPF withdrawal announced in this year’s budget — it has already exposed an inability to build a consensus among stakeholders before rushing into policy. More backsliding would further dent its policy credibility rather early in its five-year term.

Isn't there a difference between fixing interest for small saving schemes like PPF and KVP in 'advance' (which all form part of national small saving fund used for loaning states) and EPF, whose interest rate is announced after taking into account the actual return of the preceding fiscal year! The EPF has enough surplus to provide 8.9% interest, so why not? Not providing it now will mean postponing it in future and subsidizing the future contributors at the cost of past ones. Now that's I think is unfair.